As a business owner, you have spent years working on your company. Now, you may have a desire to spend more time with family, invest in hobbies or retire completely.
Selling a business is simple but not easy. Follow the steps below to effectively market your business for sale.
1. Valuation – Estimate business value by multiplying cash flow by 1- to 4-times. Cash flow equals your profit plus any one-time, or abnormally large, expenses. Cash flow also adds-back depreciation and amortization expenses. If you have a manager, you can also add your salary back into profit.
The multiple applied to cash flow depends on the company’s industry. Unless the business is a high-growth startup, value does not equal gross sales, future sales or 20- to 50-times profit. Generally, restaurants and retail sell for 1- to 2-times cash flow, and professional services and trades businesses sell for 3- to 4-times cash flow. Manufacturing businesses can sell for 7- to 10-times cash flow.
2. Select an Advisor – Once you have decided to sell your business, it is best to select a team of advisors who will help you through the process. An attorney and CPA can help you prepare your business for sale, suggest strategic buyers, provide due diligence documents and assist with closing. A business broker markets your business for sale and brings multiple buyers to the table. Wealth managers help you understand how much you must sell the company for, what to do with the money after you sell, and how to mitigate taxes.
3. Marketing Preparation – When you are ready to market your business for sale, you will prepare two marketing pieces. The first is a confidential teaser that will be part of public marketing. Confidentially is key. Prior to signing a non-disclosure agreement, it does not do anyone any good if clients, employees or vendors know that you are selling.
The second document is a multi-page prospectus that reviews all of the business’s details for the buyer to review. Your prospectus should include information about the company’s history, your background, operations, employees, clients, a summary of sales and profits and a full set of the last three years of profit and loss statements.
4. Marketing Sources – The best places to market your business for sale are through your professional advisors, competitors and online.
Professional advisors have clients and investors who may be interested in a business like yours.
Competitors, vendors and suppliers are some of the best buyers and will be most interested in purchasing your company. Take care with speaking with competitors about selling your business—they may try to steal your clients.
Finally, you can post your company online on business-for-sale websites.
5. Buyer Interviews – When you have identified a buyer, schedule a brief phone call and be prepared to provide detail about the content you included in your prospectus. In addition, you should use the call to identify if you have the right buyer to take care of your “baby.”
6. Offer Negotiation – When a buyer is interested in purchasing the business, they will submit an offer called a Letter of Intent (LOI). LOIs are not binding, and are conditioned on building appraisals, obtaining bank financing, completing due diligence and establishing contracts with landlords and suppliers. Negotiation may occur at this stage to get to the final price and terms. Either party can still exit the deal during the LOI stage.
7. Due Diligence – Due diligence involves document requests that help the buyer analyze the business and prepare for transition. This stage feels a bit like a doctor’s exam on your business, but you want to provide everything that will set up the new owner for success.
8. Purchase Agreement – The buyer’s attorney will draft the final purchase agreement. This set of documents transfers ownership of the business from the seller to the buyer.
9. Closing – A deal is not done until there is an exchange of keys and cash. Closing can be facilitated by an attorney, the bank or a title company. After closing, the buyer and seller transition business operations over the next 30-60 days.
Selling your business is simple, but not easy. However, the result of going through a sale can give you time, freedom, autonomy and accomplish your biggest dreams.
Jamar Cobb-Dennard is a M&A attorney and business broker. Selling your business is his business. Contact Jamar to learn more about valuation and selling a company at jamar@jamarcobbdennard.com.
